What an FHA loan is
An FHA loan is a mortgage backed by the Federal Housing Administration, a part of the U.S. Department of Housing and Urban Development. The FHA does not lend the money itself — a bank or mortgage lender does. What the FHA does is insure the loan, meaning if you stop paying, the FHA compensates the lender for the loss. Because the lender's risk is lower, FHA loans typically require a smaller down payment and accept lower credit scores than conventional mortgages.
The trade-off is that you pay mortgage insurance premiums — an upfront fee and an annual fee — to cover the cost of that insurance. These premiums are built into your monthly payment or added to your loan amount.
FHA loans are used to buy a primary residence only, not investment properties or vacation homes. The property must be a single-family home, a duplex, a triplex, a fourplex, or a condo in an FHA-approved building.
Key Takeaways
- An FHA loan requires a down payment as low as 3.5 percent of the home's purchase price, compared to 5 to 20 percent for many conventional loans.
- FHA loans accept credit scores as low as 500 to 580, depending on the down payment size, whereas conventional loans often require 620 or higher.
- You pay mortgage insurance premiums — an upfront premium at closing and an annual premium added to your monthly payment — for the life of the loan or until you reach 20 percent equity.
- The FHA sets limits on how much you can borrow in your area; these limits change yearly and vary by county.
- You must occupy the home as your primary residence within 60 days of closing and live there for at least one year.
Down payment and credit score requirements
FHA loans allow down payments as low as 3.5 percent of the purchase price if your credit score is 580 or above. If your score is between 500 and 579, you must put down at least 10 percent. A score below 500 disqualifies you from an FHA loan.
The credit score the lender pulls is typically your middle score from the three major bureaus — Equifax, Experian, and TransUnion. Different lenders may weight recent late payments or collections differently, so two lenders might give you different answers about whether you meet their internal standards, even if your official score is the same.
Beyond the credit score, lenders also look at your debt-to-income ratio — the percentage of your gross monthly income that goes to debt payments. Most FHA lenders cap this at 43 to 50 percent, though some go higher. Your mortgage payment, car loans, student loans, credit card minimums, and child support all count toward this total.
Mortgage insurance premiums and their cost
Every FHA loan carries two insurance premiums. The upfront mortgage insurance premium (UFMIP) is typically 1.75 percent of the loan amount and is usually rolled into your loan balance at closing — you do not pay it out of pocket unless you choose to. The annual mortgage insurance premium (MIP) is paid monthly as part of your regular payment and ranges from 0.55 to 0.80 percent of the loan amount per year, depending on the loan term and your down payment size.
If you put down 10 percent or more, you can remove the annual MIP once you reach 20 percent equity in the home. If you put down less than 10 percent, you pay the annual MIP for the life of the loan, even after you reach 20 percent equity. This is a key difference from conventional loans, where mortgage insurance typically drops once you hit 20 percent equity regardless of your down payment.
The total cost of insurance adds hundreds of dollars to your annual payment. On a $250,000 loan with 3.5 percent down, the annual MIP alone could be $1,375 to $2,000 per year, depending on the lender and loan term.
Loan limits by county
The FHA sets a maximum loan amount for each county in the United States. These limits are based on local home prices and change every year on October 1. In lower-cost areas, the limit might be $420,680 for a single-family home. In high-cost areas like San Francisco or New York City, the limit can exceed $1 million.
You can find your county's current FHA loan limit on the HUD website under "Mortgage Limits." The limit applies to the loan amount, not the purchase price — so if you are buying a $300,000 home with 3.5 percent down, your loan would be about $289,500, which must fall within your county's limit.
If the home you want to buy costs more than your county's FHA limit, you cannot use an FHA loan for that purchase. You would need to use a conventional loan, a jumbo loan, or put down a larger down payment to bring the loan amount under the limit.
Property and occupancy rules
The property must be your primary residence — the place where you live most of the year. You cannot use an FHA loan to buy a second home, a vacation property, or an investment property. You must move into the home within 60 days of closing and occupy it for at least one year.
The property itself must meet FHA standards. An FHA appraiser inspects the home and checks that it is safe, sound, and sanitary. Major issues like a leaking roof, faulty wiring, or mold can cause the appraisal to fail. The seller is responsible for fixing these problems before closing, or the deal falls through. Minor cosmetic issues do not affect the appraisal.
Condos must be in a building that is FHA-approved. Not all condo buildings may have access to — the FHA requires that at least 50 percent of units be owner-occupied, that no single entity own more than 10 percent of units, and that the building meet other standards. Your lender can tell you whether a specific condo building is approved.
How FHA loans compare to conventional mortgages
| Feature | FHA Loan | Conventional Loan |
|---|---|---|
| Minimum down payment | 3.5% (credit score 580+) or 10% (score 500–579) | 3% to 20%, depending on lender |
| Minimum credit score | 500 to 580 | 620 or higher (varies by lender) |
| Mortgage insurance | Upfront (1.75%) + annual (0.55–0.80%) | Annual only (0.5–1.5%), drops at 20% equity |
| Debt-to-income limit | 43–50% (varies by lender) | 43–50% (varies by lender) |
| Property type | Primary residence only; single-family, duplex, triplex, fourplex, or approved condo | Primary residence, second home, or investment property |
| Loan limits | Set by county; change yearly | No federal limit; lender-dependent |
The main advantage of an FHA loan is the lower down payment and more flexible credit requirements. The main disadvantage is the mortgage insurance cost, especially if you put down less than 10 percent and will carry it for the life of the loan. If you have a higher credit score and can afford a larger down payment, a conventional loan might cost less over time because the insurance drops once you reach 20 percent equity.
The FHA process and approval process
To get an FHA loan, you work with a mortgage lender — a bank, credit union, or mortgage company. The lender pulls your credit report, verifies your income through recent tax returns and pay stubs, and orders an appraisal of the home. The FHA does not review your process directly; the lender does all the underwriting and decides whether to approve you.
The lender will ask for documentation including your last two years of tax returns, recent pay stubs, bank statements, and a written explanation of any late payments or collections on your credit report. If you are self-employed, you may need to provide profit-and-loss statements or business tax returns. The process typically takes 30 to 45 days from process to closing.
Once you are approved, you receive a conditional commitment — a letter saying the lender will fund the loan if certain conditions are met, such as a satisfactory appraisal or proof that you paid off a credit card. You then make an offer on a home, and the appraisal happens. If the appraisal comes back lower than the purchase price, you can renegotiate the price, make up the difference in cash, or walk away.
Frequently Asked Questions
Can I use an FHA loan to buy a second home or investment property?
No. FHA loans are for primary residences only — the home where you will live most of the year. You cannot use an FHA loan to buy a vacation home, a rental property, or a house you plan to flip. If you want to buy a second property, you would need a conventional loan or a portfolio loan from a lender that does not follow FHA rules.
What happens if I pay off my FHA loan early?
You can pay off an FHA loan at any time without penalty. The mortgage insurance premiums stop once the loan is paid in full. If you refinance into a conventional loan after building equity, you can potentially remove the FHA mortgage insurance at that point, though you would then pay conventional mortgage insurance until you reach 20 percent equity in the new loan.
Can I remove the mortgage insurance before the loan is paid off?
If you put down 10 percent or more, you can remove the annual mortgage insurance once you reach 20 percent equity. If you put down less than 10 percent, the annual insurance stays for the life of the loan. You cannot remove the upfront insurance premium in either case — it is already part of your loan balance.
What if the home fails the FHA appraisal?
If the appraiser finds major safety or structural issues, the appraisal fails and the lender will not fund the loan unless the problems are fixed. The seller is responsible for repairs. If the seller refuses or the repairs are too expensive, the deal typically falls through and you can walk away without penalty. You keep your earnest money deposit if the failure was due to the property condition.
Do I need to be a first-time homebuyer to get an FHA loan?
No. While FHA loans are popular with first-time buyers because of the low down payment, anyone can use one as long as they meet the credit score, debt-to-income, and occupancy requirements. You do not need to be buying your first home.